Investors are in a ‘cynical’ bubble where everyone knows that current prices cannot be sustained but everyone is playing until the music stops, says GMO’s James Montier.
In his latest outlook, entitled ‘The Advent of a Cynical Bubble’, the value investor outlined the four major types of bubble and explained why we are beyond fads and euphoria and are now heading towards an extended end game.
Dismissing the idea that we are in a mania-led bubble such as the TMT or Japanese bubbles, Montier added that this is not an intrinsic bubble either – in which fundamentals are at fault – but instead one that academics call ‘a near rational bubble’.
‘I am not a great fan of this nomenclature as it suggests a veneer of respectability that I find undeserved. To me these are really better described as greater fool markets,’ he said.
‘They are cynical bubbles in that those buying the asset in question don’t really believe they are buying at fair price (or intrinsic value), but rather are buying because they want to sell to someone else at an even higher price before the bubble bursts.’
Montier singled out comments made by Citibank’s former CEO, Chuck Prince, in 2007, who said: ‘As long as the music is playing, you’ve got to get up and dance. We are still dancing.’
‘I would suggest that this is exactly the sort of market we are observing at the current juncture. Fund managers for the most part all agree that the US market is expensive but still they choose to own equities – a cynical career-risk-driven position if ever there was one.
‘I have been amazed by the number of meetings I’ve had recently where investors have said they simply “have to own US equities”,’ he said.
One defining factor of a ‘cynical bubble’, Montier said, is the belief by those participating that they can be the first to exit at times of trouble.
‘Cynical bubbles are based on a belief that one can get out before everyone else. Obviously, this is simply impossible. Like a game of musical chairs played at a child’s birthday party, when the chairs are increasingly rare, the competition for them gets fiercer.
‘Crowded exits don’t end well – inevitably some are crushed in the stampede,’ he said. ‘Perhaps you are skilled at picking the managers with great timing ability, and perhaps those managers do have great timing ability, in which case, good luck.
‘As for me, I prefer to leave the party early, in the knowledge that I can walk away with ease.’